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HTC: Not the best way to sell a smartphone

As HTC readied a new version of its flagship smartphone, it planned for many challenges.

As HTC readied a new version of its flagship smartphone, it planned for many challenges. It didn't know that one of them would be Roshan Jamkatel, a teenager from Schaumburg, Ill.

On March 2, Roshan — a self-described prankster — turned up on YouTube offering a hands-on, guided tour of the sequel to HTC's highest-profile product, the One. The world's first glimpse of the device was scheduled for this Tuesday, March 25, at the sort of orchestrated reveal that has become the industry standard, with product demonstrations, plenty of video-screen close-ups and a crowd to give the proceedings a sense of moment. Locations in New York City and London were booked for the occasion.

But Roshan upstaged this show with a rambling, mumbly critique that was posted for all the world to see. (The video was up, then taken down, then resurrected on a batch of Android fan sites, and now is much harder to find.) Forget stagecraft. The phone was placed on what appears to be Roshan's outer-space-themed bedspread, and his monologue was sprinkled with bland endorsements like, "The build design of this phone is really nice," and "This camera, I give it a 9 — no, an 8.7."

You imagine that after watching this sneak peek, HTC emitted a sound similar to the whup-whup-whup that Curly of the Three Stooges made whenever Moe poked him in the eyes. But publicly, the only sign of outrage was a message from HTC's senior global online communications manager, Jeff Gordon, to Roshan's Twitter account.

"It's not going to be a good week for you, my friend," Mr. Gordon wrote.

"It's a fake phone," Roshan tweeted back.

"We have the IMEI and all the other info," replied Mr. Gordon, referring to the unique identifiers given to each device. "We'll be in touch."

Mr. Gordon would not comment about this exchange, and Roshan did not respond to a message left on his mobile phone. But it was only the most notable leak of many that have bedeviled the run-up to the official introduction of the new phone, which might be called the All New One. The leaks have included photographs, performance specs, downloadable versions of wallpapers and ringtones, a look at a new smart cover, an ad explaining the new dual-lens camera and what is apparently a sales guide for retailers. ("Load up the camera and show the customer how they can take a selfie in the new Selfie mode.")

As a final indignity, one of the new phones was sold on eBay for about $500.

So much for the element of surprise.

These are just the latest setbacks for HTC, a company based in Taiwan that as recently as 2011 sold more smartphones in the United States than any other maker, according to the research firm Canalys.

Since then, shares of HTC have plunged almost 90 percent, shrinking its market capitalization to $4 billion from $33 billion. HTC's biggest problem is its mightiest foe, Samsung, which last year spent $14 billion on advertising — about the same as the G.D.P. of Iceland. HTC posted its first-ever operating loss in the third quarter of 2013, after which ABI Research, a consulting firm, said that once such handset companies become unprofitable, only 10 percent can be expected to survive the next two years.

The prognosis underscores how perilous the smartphone business has become. In just five years, companies like BlackBerry, Nokia and Motorola have gone from leaders to takeover bait or balance-sheet basket cases. Start-ups in China, India and Brazil are grabbing mid- and low-end sales, and the high-end market is increasingly dominated by Samsung and Apple.

Continue reading the main story "If you're not a Tier 1 smartphone maker, it's difficult to be heard," said Ken Hyers, a senior analyst at Strategy Analytics. "You don't have the megaphone, which is the marketing spend."

Typically, manufacturers like HTC crater because their products stink. But HTC's downward spiral has distressed plenty of phone geeks who think it makes the best devices on the market. The One, released in 2013, earned the "Smartphone of the Year" title at the Mobile World Congress, held in Barcelona in February, and was only the third phone to win a five-star review from TechRadar. A critic at the site said the phone "is closing in on flawless."

A reviewer at AnandTech said, "The One is without a doubt the best Android smartphone I've ever used." And David Pogue, the former tech critic at The New York Times, wrote, "You could quibble with the software overlays, but it would be hard to imagine a more impressive piece of phone hardware."

It isn't enough, though, to design a great smartphone. You also need to sell it, and when your main rival is blanketing the planet with ads, your marketing strategy had better delight and astound.

HTC's did neither.

"The most important thing is communication, and we didn't communicate with our end users well last year," said Cher Wang, HTC's co-founder and chairwoman, in a telephone interview on Wednesday. "We're going to do it better this year."

Among the company's 2013 misfires was an extravagant and daring two-minute ad starring Robert Downey Jr., which was first shown in August.

Mr. Downey plays a swaggering marketing genius who emerges from a helicopter, a briefcase chained to one hand, and is ushered into a room full of executives to explain how HTC should position itself.

"Humongous tinfoil catamaran," he says, cryptically.

After a pause, an aide to his right holds up a business card bearing the company's logo. "HTC," he says to the befuddled executives. "It's anything you want it to be."

What follows is a random series of h.t.c.-initialed tableaus: a hipster troll carwash, a hot-tea catapult, a Hungarian tuba concert.

The One made brief cameos in the ad, but they were easy to miss. Describing HTC as "anything you want it to be" didn't do much to build an idea of the brand.

"Sadly, the introduction of the phone itself, which has a great many selling points, gets lost in all that high-concept stuff," said Barbara Lippert, a columnist for Mediapost.com and a former ad critic for Adweek. "A lot of money, great production, and acting went into it, signifying not much to sell the phone."

The ad was reportedly the start of a two-year, $1 billion campaign. Within HTC, it was widely considered a letdown.

"We were told that this ad was going to save the company," said a former employee, who spoke on condition of anonymity because he did not want to antagonize onetime colleagues. "Then we saw the ad."

Ms. Wang said the ad's mixed reception was fine with her.

"Some people really loved it; some people didn't understand it," she said. "No matter what, people were talking about HTC and that was the purpose."

Ms. Wang is the daughter of a billionaire and went on to make her own billions as a co-founder of HTC and a chip set maker, VIA Technologies. Educated at the University of California, Berkeley, she is known for toughness as a negotiator and for optimism — a trait much on display in the interview. Time and again, she would glancingly acknowledge errors, then pivot to her excitement about what's next.

"I want to look forward," she said. "I always look at the past as an opportunity to learn."

Continue reading the main story If so, she has a full curriculum. Since last year, HTC has seemed like a rickety ship that crew members were eager to abandon. In the span of just a few months, HTC lost Rebecca Rowland, global retail marketing manager; John Starkweather, director of digital marketing; Kouji Kodera, chief product officer; Jason Gordon, vice president for global communications; and Eric Lin, product strategy manager.

Mr. Lin posted a departure tweet in May that said, "To all my friends still @HTC — just quit. leave now. it's tough to do, but you'll be so much happier, I swear."

Ms. Wang dismisses the notion that HTC has a brain-drain problem, saying, "we retained all the people we wanted to retain."

There were also a handful of employees who made newsworthy exits. In December, Thomas Chien, who had been a vice president for design, was indicted by Taiwanese prosecutors on charges that he leaked trade secrets. He and a handful of other employees were also indicted on charges of taking kickbacks from suppliers and falsifying expense reports. Local news media reported that investigators said they found more than $250,000 worth of Taiwanese currency, in fresh bills, in Mr. Chien's Audi, parked outside of HTC's headquarters.

Mr. Chien, who has denied the charges, reportedly said he didn't know where the money came from.

HTC was founded in 1997, initially producing notebook computers. For years, it was a contract manufacturer of hand-held devices for other companies, pioneering phones with touch-screen interfaces. In 2006, it started making products under its own name, and a year later Google introduced Android, which became the operating system of choice for HTC products. By 2011, the company's market cap exceeded that of Nokia, once the Goliath of the field.

"However you count it," wrote Chris Jones, an analyst at Canalys, in October 2011, "HTC has become a deserved leader in the U.S. smartphone market."

A lot went wrong between then and now. Ms. Wang says the company had trouble keeping up with demand for the One last year, because of the phone's complexity.

"This is a metal, unibody phone," she said, adding that its antenna and camera were engineering feats in themselves. "We didn't train our vendors well enough for mass production."

Analysts also say that some of HTC's other smartphones were mediocre, and a few weren't updated with the latest version of Android until long after Google released it. But perhaps the biggest disaster for HTC was the onslaught of Samsung, which jumped into the Android smartphone pool in 2009 and has been doing cannonballs ever since.

"The company's target may have been Apple but some of these smaller players were the victims," says Horace Dediu, founder of the consulting firm Asymco. "This is a classic case of disruption. HTC couldn't play on the same scale as Samsung."

Ms. Wang says HTC can still compete, even against Samsung's marketing muscle. Just look at Tesla, the electric car marker, she said. It isn't as big as any traditional automaker, but it has drummed up a remarkable amount of attention.

This is true, but Tesla is more of a niche seller than a mass-market player. Which might be what HTC becomes if sales of its all-new phone don't set some all-new records.